[By Sunidhi Kashyap]
The author is a student of Rajiv Gandhi National University of Law, Punjab.
Introduction
A failed attempt at acquiring a healthcare company involved in developing early cancer detection tests, led to an interesting take on the European Union Merger Regulation (“EUMR”). Illumina, an American biotechnology company manufacturing and selling next generation sequencing (“NGS”) systems, used in developing blood-based tests to detect cancer, wanted to acquire GRAIL, an American healthcare company engaged in developing an early multi-cancer detection test in asymptomatic patients.
Illumina had publicly announced its intention to acquire GRAIL for $8 billion in 2020. However, this acquisition embroiled Illumina in a legal battle with both, the EU and the US regulators on account of the anti-competitive nature of this deal. While the unsuccessful deal of Illumina and GRAIL is known for the unique interpretation of Article 22 of EUMR given by the General Court (“GC”), it has also paved a path for regulating combinations. The interpretation given by the GC shows that though the deal was within the threshold limit of notifying the relevant authorities, it still had the potential of stifling innovation in a constantly evolving and emerging market like healthcare.
In this context, this post will firstly shed light on the role of Article 22 of EUMR in this deal; secondly, it will discuss the importance of regulating combinations in markets of innovation and lastly, it will identify the lacunae in the Indian competition regime and would suggest a way forward.
Article 22 of EUMR and the Illumina-GRAIL deal
Illumina is the top supplier of NGS systems and GRAIL was a customer of Illumina, using its NGS systems to develop cancer detection tests. According to the investigation of the European Commission (“EC”), a vertical merger between the two could destroy competition in the market of early cancer detection tests as Illumina would be incentivized to not share its technology with GRAIL’s rivals and consequently, without the essential input from Illumina, GRAIL’s competitors would be put in a disadvantaged place. The market players were apprehensive that post the acquisition, Illumina would monopolize the emerging market of early cancer detection tests by limiting access to its NGS systems.
While both the American healthcare companies did not exceed the relevant thresholds and did not have any European dimension it was still subject to scrutiny by the EC. This was possible only because Article 22 of EUMR permits Member States to request the EC to investigate the concentration if it affects competition within the territory of the Member State. When looked closely, Article 22 plays a crucial role by regulating those combinations which fall within the turnover threshold but still carry an adverse effect on competition in a market. Especially, in cases of killer acquisitions, where the nascent firms are bought by the incumbents to prevent any future competition, provisions like Article 22 are important to maintain healthy competition in the market.
In India, however, combinations under the Competition Act, 2002 (“The Act”), are looked from an antitrust lens only when it exceeds the turnover or asset thresholds. This “safety net” or the de minimis exemption excludes many combination deals in emerging markets, especially where a tangible product may not be developed yet but its merger with an incumbent firm still poses antitrust concerns. In this context, this article will argue for treating combinations in emerging markets or markets of innovation differently, by accounting for their peculiarities.
Markets of Innovation and Antitrust Concerns
Emerging or markets of innovation refer to those markets where there is constant scientific development, inventions, technological advancements, improvements or modifications. They largely refer to the research and development (“R&D”) intensive sectors. A unique characteristic of such markets is that it may not necessarily possess a tangible good which is ready to be sold. For instance, in the case of the Illumina and GRAIL deal, the early cancer detection test being developed by GRAIL was not a ready product yet. Despite that, the merger would have stifled innovation and competition in an emerging market which could potentially lead to a reduced consumer choice.
In innovation markets, the R&D development is much more fast-paced, making it more volatile than a traditional market. For instance, the infamous IBM “debacle” presents the perfect example of how innovation markets are difficult to predict. In 1969, IBM was a major player with the highest market share in the computer manufacturer sector and was being sued under Section 1 of the Sherman Act for restraint of trade. The case went on till 10 years and towards the end, it was simply dismissed in 1982 because IBM was no longer a monopolist and had lost its dominance in the market. This case shows that R&D firms are always vulnerable to radical changes and their dominance is only temporary. However, this does not mean that antitrust analysis would be completely absent in these ever-evolving markets. Being dominant in such markets for 10-20 years takes substantial resources from the economy and stifles innovation and competition both.
Lacunae in the Indian Competition Regime
While dealing with combinations in innovation markets, the biggest roadblock is posed by the “safety net” or the thresholds specified under the Act. The thresholds prescribed under the Act are of two types- turnover and asset. Only if a combination surpasses these thresholds would the Competition Commission of India (“CCI”) undertake an investigation for ruling out any appreciable adverse effect on competition in the market. Moreover, given the recent enhancements of these limits and the de minimis exemption, a lot of combination deals fall outside the scope of the Act. Additionally, it seems that the Act has a brick-and-mortar enterprise centric approach which assumes that a firm would traditionally make large investments in assets and aim to obtain a higher turnover. However, in the current technologically advanced times where the internet is progressively reducing the requirement to acquire assets, and firms are becoming dominant without heavy investments, such an approach seems outmoded.
Another hindrance with respect to innovation markets is the definition of ‘market’. As it currently stands, in a traditional market, a ‘relevant product market’ is based on interchangeability or substitutability of present goods. Since these R&D companies base their products on intellectual property (“IP”) which are patented, copyrighted or subject to trade secrets, there will be little to no scope of interchangeability, leading to a much narrower interpretation of a ‘market’ and consequently leaving out many combination deals. Therefore, for innovation markets, there is a need to adopt a more flexible definition of a ‘market’ which also accounts for potential future goods by identifying both actual and likely participants who have the capability and incentive to undertake closely substitutable R&D.
The Way Forward
In the Illumina-GRAIL deal, the GC categorically specified that Article 22 of EUMR applies to any concentration falling below the turnover thresholds but still carry potential anticompetitive effect. In a way, Article 22 of EUMR is a form of ‘corrective mechanism’ enabling the EC to conduct a case-by-case investigation for combinations which presumably doesn’t harm contemporary competition, but upon further analysis, might have an adverse impact on the market. Per contra, in the Indian competition regime, a corrective mechanism like that under Article 22 of EUMR does not exist. Combinations under the Act are afforded an antitrust analysis only if it crosses a certain threshold. However, in light of so many combinations happening in the technology and other innovation sectors, there exists an enforcement gap.
To bridge this gap, specifically in the context of in innovation markets, it is suggested to adopt a similar referral mechanism as under the EUMR to empower concerned competitors to raise objections over combinations, which although under the relevant threshold, has the potential to foreclose competitors in that emerging market. And for an effective antitrust analysis under the Act, it is suggested to adopt a flexible approach of identifying relevant product market by factoring in future goods and likely participants in that emerging market. The test of substitutability should not be applied in this case. As long as two firms are working towards similar technology or product, it may replace each other in the eyes of a consumer. Such an approach will help delineate an innovation product market more precisely.